Good morning ladies and gentlemen and welcome to Genworth Financial’s fourth quarter 2019 earnings conference call. My name is Derek and I will be your coordinator today. At this time, participants are in listen-only mode. We will facilitate a question and answer session towards the end of this conference call. As a reminder, this conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones, or headsets during the Q&A portion of today’s call. I would now like to turn the presentation over to Tim Owens, Vice President of Investor Relations. Mr. Owens, you may proceed.

Thank you Operator. Good morning everyone and thank you for joining Genworth’s fourth quarter 2019 earnings call. Our press release and financial supplement were released last night and this morning our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all of these materials. Today you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Kelly Groh, our Chief Financial Officer. Following our prepared comments, we will open up the call for a question and answer period. In addition to our speakers, Kevin Schneider, Chief Operating Officer and Dan Sheehan, Chief Investment Officer will be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation, as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning’s discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, when we talk about results of our Australia business, please note that all percentage changes exclude the impact of foreign exchange. Finally, references to statutory results are estimates due to the timing of the filing of the statutory results. Now I’ll turn the call over to our CEO, Tom McInerney.

Good morning and thank you for joining today’s call. Today I will focus my remarks on the status of our pending transaction with Oceanwide. As we have previously discussed, including during the December 12, 2019 Genworth annual shareholders meeting, after the successful closing of the sale of the company’s interest in Genworth Canada for approximately $1.8 billion, the two key remaining Genworth approvals for the China Oceanwide transaction are from the GSCs and the New York regulator, the New York Department of Financial Services. These regulators had previously approved the Oceanwide transaction, but because of the transaction closing delay given the time it took to complete the Genworth Canada sale, their respective approvals expired. The GSCs and FHFA, their regulator, have re-approved the transaction, leaving New York’s approval as the most significant remaining Genworth approval. Genworth and New York have been engaged for months in discussions regarding the fourth quarter ’19 assumption review for Genworth Life Insurance Company of New York, or GLICNY, and the re-approval of the transaction. As part of the discussion process, New York has recently told China Oceanwide and Genworth that the re-approval would be conditioned on a capital contribution by Genworth Financial to GLICNY. The parties may or may not be able to reach a mutually acceptable compromise and any capital contribution to GLICNY would require Oceanwide’s consent under the merger agreement. Genworth shareholders and other stakeholders are well aware of the many concessions China Oceanwide and Genworth have made to various Genworth regulators since the transaction was announced three-plus years ago. These concessions and the willingness of China Oceanwide and Genworth to continue this process for more than three years make it very clear how committed we both are to the transaction. As we have said many times, the Genworth board and I believe…

Thanks Tom and good morning everyone. Today I will cover our fourth quarter financial results and our annual assumption review. I will also discuss capital levels in our businesses and provide updates on cash and flexibility at our holding company now that we have completed the Genworth Canada sale and subsequently retired approximately $840 million in debt through January 2020. As we discussed in detail last quarter and noted in our press release, our current and historical financial statements fully reflect the disposition of Genworth Canada. During the quarter, we recognized a net loss from discontinued operations comprised mainly of two pieces: one, $57 million of income primarily from Genworth Canada, which included a favorable tax adjustment as we refined our tax position related to the divestiture that closed in December; and two, a charge in the amount of $110 million after tax related to Genworth’s former payment protection insurance business which was sold to AXA in 2015. This followed a U.K. court ruling in early December 2019. The charge covers an interim payment made in January with respect to any damages which could be awarded following a June damages hearing. While not common in the U.S., interim payments are common in the U.K. legal system prior to damages being determined. We have initiated the process for appealing certain aspects of the December ruling. At this time, we are uncertain of the ultimate outcome of our appeal and the June damages hearing, and we are also unable to estimate additional amounts that may be due or demanded under a ruling. To date, AXA has submitted to us invoices claiming aggregate losses on payments to customers of approximately £430 million, which may be amended prior to the damages hearing. AXA is also seeking a tax gross-up on the amount invoiced. We…

[Operator instructions] Our first question comes from Ryan Krueger with KBW. Please go ahead.

Hi, good morning. I had a few questions. First, can you give us any indication of the potential size of the capital contribution that New York is asking for, and any more perspectives on would you be willing to make some level of capital contribution to New York to get their approval but just less than they’re currently asking for?

Ryan, that’s a very good question. It’s very hard to answer because we’re in active discussions with New York. What I would say is China Oceanwide and Genworth are willing to make a capital contribution. The size is to be determined and to be discussed with New York. The one thing I would remind people is GLIC - Genworth Life Insurance Company is--you know, the LTC policies, a little over a million policies, 1,040,000 I think for all 49 states, and so the 49 states have an interest in GLIC and GLIC’s capital position. As part of the transaction, we did agree, as you all know, to put $175 million into GLIC. China Oceanwide and we agreed to that. In the case of New York, in their original approval they didn’t ask for capital. They are now, and part of that is clearly the fourth quarter review and discussions we’re having. One thing that I tried to say in my remarks is GLICNY is much smaller than GLIC - 76,000 policies all in New York, so it’s one state, and I think part of the challenge for Genworth and Oceanwide on one side and New York on the other side is it’s just not the two parties, because there are 49 other states and 49 other regulators who also have an opinion, so one of the things that we have to keep in mind is the views of Delaware and Virginia - there our two other lead states, and then North Carolina, which is USMI, but they all have LTC policies, North Carolina Virginia and Delaware in GLIC, so the size of any capital contribution, obviously it’s important to New York, they’ll want more than less, but we do have to make sure it’s reasonable given what we agreed to for the 49 state company.

Is that because the capital contribution would actually come from GLIC, or would the capital contribution come from the holding company but they just want to make sure the amount is fair relative to what you agreed to put into Delaware?

What we’re talking about would be a capital contribution from Genworth Financial, the parent.

Okay. My last question, related to the New York, so if you do get the approval from them before March 31, would you be willing to extend the agreement beyond March 31 if you haven’t received all the other approvals at that point, or is that comment just specific to New York?

Another good question, Ryan. I would say that we have all the key approvals except for New York, so if we could come to a conclusion with New York soon, and we’ve been talking to them for many months, and they approved and their approval was acceptable to the other regulators who have approved, and we still owe a few pieces of financial information, some of it is relative to results for China Oceanwide and their recent quarters and things, but I think if New York--if we could agree with a capital amount with New York that was acceptable to China Oceanwide, acceptable to the other regulators, then I think we’re ready--Genworth is ready to close. I think Oceanwide is also ready to close. As we’ve said before, the one remaining significant issue in China is they would have to talk to the State Administration of Foreign Exchange, or SAFE, in terms of the $2.7 billion they’re paying to purchase Genworth, where is that coming from, and China Oceanwide does have significant excess cash in China, and if they were able to use that, that would cover the purchase price. However, and this has been part of the filings for more than a year, to the extent that SAFE put a limit on how much capital could come out from China, they do have a contingency plan to fund the balance of the transaction from outside of China. So that would be if we agreed with New York, acceptable to China Oceanwide, acceptable to other regulators, we’re both ready to close and then China Oceanwide, obviously is in the lead in discussions with SAFE about where the funding comes from, and therefore we certainly--our goal is to close by the end of the first quarter. We recognize that it’s been three and a half years and we can’t keep extending forever.

Got it, thank you.

Thank you. Our next question comes from Joshua Esterov with CreditSights. Please go ahead.

Hi, thank you. Good morning. With regards to what you were just mentioning with China Oceanwide needing regulatory approval from SAFE, is that a process that can only start once the U.S. regulatory--

I didn’t quite catch the last of it. Would you repeat your question, Josh? It’s a good question, just in case--

Yes, with regard to--sure, sorry about that. With regards to China Oceanwide requesting approval from SAFE for the currency conversion and purchase, is that a process that can only start once the U.S. regulatory process has concluded?

First of all, there have been other China regulatory approvals, including with the NBRC, so that was passed on. I think the remaining issue is with SAFE. Chairman Lu, who is the owner of Oceanwide, and the Oceanwide management team have been talking to all the regulators and others in China. I have said in the past that I think because of the aging problem in China, if you read a lot of public commentary from the government and others in China, there is a significant elderly, aging problem, so I do think generally China and the regulators are supportive of the deal. I’ve talked to CBIRC, which is the regulator, four or five times and they’ve always been supportive because of the Genworth expertise. SAFE has been in touch with Oceanwide along the way. I think they know it’s hard for SAFE to make a final determination of what they’re going to approve until they know what the final deal is. I will say that none of the China regulators have asked for any concessions, any accommodations on our deal over the last three and a half years. The only concessions and accommodations were from Genworth regulators, so first we had CFIUS and that took 18 months, and then we had the Delaware process and they wanted the $175 million, and that was approved, and then OSFI wouldn’t really give us an answer and so we felt the only way around that was to sell Genworth Canada. We think we got a very attractive price for it, so did China Oceanwide, so that meant that we didn’t need the Canadian regulatory approval. I did say in my remarks one of the things that I want to give a lot of credit to is China Oceanwide and Chairman Lu, because…

Really appreciate all those thoughts on the regulatory front. Thank you very much.

Thank you. We’ll next go to Bill [indiscernible] with Bytespeed Partners.

Hey Tom. I’m going to try this again. If I do my numbers right, you’re paying basically $175 per policy, which means that New York is owed roughly $13 million-odd, call it $15 million. Is that what you’re offering and they’re asking for dramatically more? That’s my first question. My second question is are you talking to the staff or is this actually coming directly from the director of DFS? Thanks.

Good questions, two-part question. I’ll take the first part. There are different metrics you can use to compare the size of New York to the Delaware company. One is lives, so it’s 76,000 to 1,040,000. The other is relative capital, and since we haven’t finished the statutory process yet, I’ll go with 9/30 numbers. At 9/30, the capital in New York was around $300 million and the capital in GLIC was $2 billion, so if you do that basis, $300 million to $2 billion, I think it’s 15%. Then if you look at premiums, generally the premiums are higher per policy in New York than the other states because New York is more expensive. For example, I think the average cost for a year in a nursing home in New York is $125,000, the national average is $100,000. So generally, I think the agents and financial advisors who sold those 76,000 policies generally had the policyholders in New York buy higher daily benefit amounts, so therefore the daily benefit amount per policy is higher in New York so the premiums on average in New York are higher. If you do premiums on the 76,000 policyholders - I’m using 2018 data, it rounds $240 million were the annual premiums in ’18, and the annual premiums in GLIC were about $2.4 billion, so roughly 10%. Those are different metrics, we’ve talked about different metrics, different bases with New York, and I’m not going to go into where we are with New York but I would say I think it does matter ultimately, and I would just expect--and we are talking to Delaware, we’re talking to Virginia, and I talk to all 50 states all the time because I’m generally involved in all the premium increase discussions, so I have a good sense…

Understood, thank you. This is very helpful. So this is still actuaries to actuaries? This is still where you are in the process, rather than at the top, at the approval level?

I would say it goes from the top through the actuaries for Genworth and it goes from the top through all the staff at New York.

Thank you.

Thank you. Our next question comes from Drew Figdor with TIG. Please go ahead.

Hi. I was curious, reading through the report we saw come out last night, it seemed that the margin testing was rather benign in terms of the long term care, so I’m curious what New York has found this year as so concerning that they need to have capital injected, but last year they were fine and they didn’t ask for anything in terms of capital commitment. What changed in the year in terms of margin testing that New York is so concerned about?

Drew, this is Kelly Groh. Thanks for the question. What I would say about New York is we really just have very emerging experience. I think Tom mentioned about 13,000 cumulative claims. If you think about 13,000 cumulative claims, our view is, like I mentioned in my prepared remarks, those aren’t credible just given the fact you’ve got to look at different underwriting classes, different genders, different age groups of the folks and different policy series, because there were underwriting changes that occurred. But we have seen, as I mentioned, different experience and particularly higher severity from some of those claims in New York. We don’t quite view those as credible yet, but it is emerging, and that’s the discussion we’re having. Now, we’re also under a triannual exam right now, so they’re taking a much deeper look at it, and we are working with their group as a part of that exam and discussing that experience. But it is under discussion and we’re working through the cash flow testing assumptions right now. Did that answer your question?

Yes, thank you.

Thank you, Drew.

Thank you. Ladies and gentlemen, we have time for one final question from Himanshu Shah with Shah Capital. Please go ahead.

Morning Tom. I have a question on your Plan B. Do you think Genworth can get $2 billion or more IPOing 40% to 50% of USMI in early Q2, if you cannot close this deal by the end of March?

Himanshu, good morning. Thanks for the question. Thanks for being on the call and thanks for being a good, long term investor. I would say that our board has looked at all different kinds of alternatives, including I think all of the possible alternatives with USMI. The only thing I would say is there are tax consequences depending on the amount of the IPO, and so you could have significant tax friction depending on the size that you do. I’m not going to try to value USMI. I think we disclosed today the book value for USMI, I think it’s around $3.8 billion. There are comparable companies out there that are publicly traded. That doesn’t mean that we would trade the way they trade, but I think they’re reasonable comparables, so I think for you, Himanshu, or other investors, I think you have to look at our book value, look at the earnings, the 2019 earnings were strong in USMI, $568 million. So there’s $568 million, look at the comparable PE multiples. The book value is 3.8, look at the comparable book value, and then you can come up with a view as to what you think the values are. But I would say that--and I’m sure you know this and others know, that when you go beyond a certain amount in the IPO, you could create tax issues and also--and again, not getting in all the rules, etc., depending on how much you do, you can prevent a future down the road opportunity to do a tax-free spinoff to Genworth shareholders. I don’t want to go into all the different alternatives. I will tell you, as I said in my script, we’ve extended this deal 13 times. Every time we extended the deal, we valued what we thought China…

All the best, Tom, but the way the stock is trading at for the last three years or so, and especially today, it clearly tells me that the company should plan aggressively for Plan B. Thank you.

You know, I think there’s two ways to look at it, Himanshu. One is what you just said, and we’ll do that. The other is that I do think that most in the market seem to agree that the best option is the China Oceanwide option, which is $5.43, because the stock has traded at a discount. I think every time the stock has changed and when it’s gone down, who knows why. We had a great fourth quarter, we had a great 2019, so I don’t think it’s because of our operating results. We’re making great progress on the LTC premium increases, so I don’t think it’s that. But I do think investors recalibrate the probability of the China Oceanwide deal closing and they know what that’s worth, $5.43. They all have--the market has a view of what the next best alternatives are, and so I think when the stock is down, because we raise--you know, want to be transparent that we’re in negotiations with New York, I think that means shareholders put a lower probability on the Oceanwide deal closing, and I think the market is telling--what I think it’s telling the Genworth board and management is we prefer the Oceanwide deal, we agree with you it’s the best and most certain deal. We continue to get over 90% support for all the directors on the board, including as of last December, and so when the stock falls, we’re watching it as you are, I think it’s falling because investors are re-assessing the probability of Oceanwide closing and it’s falling because the $5.43, perhaps they put a low probability on that. But I don’t know. That’s the market. But be assured we hope we can close the deal, we’re doing all we can to try to get it done. We’re talking to New York and then all the other regulators, and China Oceanwide. I hope we can get it done. If we can’t, we’ll do what you said - we’ll move quickly to the best Plan B. We’ll talk to shareholders like yourself and get input, and I believe we’ll ultimately hold an investor day so we can talk--if we have to get to a Plan B, to talk about that and say whatever the Plan is, why we think it’s the best. But you know, shareholders have different views, and if based on those views we think another alternative is better, because in the end it’s about what’s the best long term shareholder value to shareholders, and if there’s another idea that emerges that’s better, we’d obviously consider it.

With that, Himanshu, I appreciate that. I do want to say to all the investors, we ran a little bit over - 10 minutes, there’s obviously a lot of questions on the deal, so we wanted to take some of them. But Kelly and I are happy to continue the discussions with any shareholders who want to give us their views or talk to us. Please contact Tim Owens in IR. Let me just sum up and then I’ll turn it back to Derek to end the call. All of us at Genworth want to thank you for your questions and your continued investment and interest in Genworth. As I’ve said, we’re working hard to close the China Oceanwide transaction. We continue to believe it’s the best and most certain outcome for our shareholders and all of the other stakeholders. But having said that, I also want to be clear today that if we can’t complete the transaction, we are prepared to move forward with evaluating other alternatives, and the board and I and the management team take very seriously our fiduciary duty to maximize the value to shareholders, no matter what ultimate outcome we pursue. With that, Derek, I’ll turn the call back to you.

Thank you. Ladies and gentlemen, this concludes Genworth Financial’s fourth quarter earnings conference call. We do thank you for your participation. At this time, the call will end.